Tax Consequences of Planned Purchase of Topped Crude Oil

May 27, 1999 BIR RULING NO. 073-99 24 (A) (c) 148-155-98-073-99 Engr. Benjamin S. Santos President and General Manager Bensan Industries, Inc. 353 EDSA, Kalookan City S i r : This refers to your letter dated April 5, 1999 requesting for a ruling on your planned purchase of topped crude oil from Shell Philippine Petroleum Corporation (Shell). It is represented that you are an inventor duly certified by the Filipino Inventor's Society and a holder of Philippine Patent No. 28342 entitled "An Improved Process for Re-refining Used Oil"; that you would like to buy topped crude oil from Shell's plant at Pililla, Rizal to commercialize your invention; that before removing the crude oil from Shell, you will have the same processed at the said refinery into base stocks which will be used as direct raw material for the manufacture of re-refined oil; and that Shell has already paid the corresponding duties or taxes on its importation or local purchase of topped crude oil. Based on the foregoing representations, you are now requesting for a ruling on the following: 1. Whether or not there is a tax due on your purchase of crude oil from shell inside their refinery. 2. Whether or not the base stocks (produced from the topped crude oil) which you will use as raw material for its patented invention will be subject to excise tax. 3. Whether or not the yields from the processing of topped crude oil such as wax and asphalt are subject to other taxes. In reply, please be informed as follows: 1. Since your primary purpose for buying topped crude oil (raw or in its natural and unprocessed state) is to secure the raw materials for your inventions presumably at lesser cost, then as a purchaser, you are not liable to pay any tax on your said purchases of topped crude oil. Furthermore, the sale of crude oil not being among those enumerated under Section 148 of the Tax Code of 1997 as excisable petroleum product, is not subject to excise tax. However, Shell, as seller of the said crude oil, shall be subject to income tax on whatever gain it may derive on the transaction. 2. Your second query is answered in the negative. By buying and paying for the topped crude oil, you are technically the owner of the material. Hence, if instead of removing it, the same is further processed by Shell pursuant to any arrangement you may have with them and out of which process base stocks become the yield, the removal of the later is not subject to excise tax imposed under Section 148 of the Code because as an inventor, you enjoy the privilege of being exempt from excise taxes pursuant to Section 3(c) of Revenue Regulations No. 19-93 implementing R.A. No. 7459, otherwise known as the "Inventors and Invention Incentives Act of the Philippines". 3. As regards other yields not used for the commercialization of your invention, such as, wax and asphalt, in case you remove and sell the same, you shall be subject to the corresponding excise tax imposed under Section 148 of the Tax Code of 1997, and the gains derived therefrom shall likewise be subject to the income tax imposed under Section 24(A)(c) of the Tax Code of 1997 notwithstanding your exemption as an inventor under Section 5 of R.A. No. 7459. (BIR Ruling No. 155-98 dated October 21, 1998). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group